The Daily Reckoning U.S. EditionHome . Archives . Unsubscribe 
The Daily Reckoning | Wednesday, May 25, 2011
-------------------------------------------------------
Is This The Last Stock You'll Ever Need?
This one tiny stock could be the last one you'll ever need. You're about to see a story so shocking and hidden - it could rival the great wealth creations in history.
Get all the details - right here - before midnight Monday, May 30.
Who to Blame for Your Broken Window Debunking the Myth of a Free Market Run Wild
Reporting from Buenos Aires, Argentina...
Joel Bowman
A question for you, Fellow Reckoner: Why do people so frequently demand more of the same poison to cure what ails them? Is it because they are stupid? Are they too busy with their workaday lives to notice the difference? Or are they being persistently lied to and indoctrinated?
Most likely, it's a mixture of all three. Today, we address the third point.
One of the more pervasive myths, perpetuated - either ignorantly or maliciously - by the mainstream media, is that the market tumult witnessed over the past few years is somehow a result of the free market having "run wild."
The argument, as you are surely familiar with it, goes something like this...
Until recent and heroic intervention by the Feds, the world had been aimlessly bobbing about on a sea of unregulated, laissez-faire capitalism. Adrift in the cold, harsh, dog-eat-dog seascape, where rules were callously discarded and government vigilance eschewed, we clueless individuals simply made our way as best we could. Of course, it wasn't long before we lost sight of the horizon. Then, the clouds of capitalist deceit obscured our view of the stars, by which we had previously been navigating our way across the perilous oceans. Sensing our vulnerability, the greedy capitalists stealthily moved in under the cover of "free market anarchism" to rock the markets and capsize our tiny, unguarded vessel.
What followed - around 2007-08 - was the painful aftermath of a great era of free market irresponsibility. Lessons were to be learned. Regulators, it was said, had failed to protect us (mostly from ourselves). The markets had been allowed to "run wild," fleecing all and sundry of their earthly wares. The whole system was in danger of collapsing under the weight of its own free reigns and pundits from every corner of the boat were soon crying out for some form of central guidance, some direction, some calm. This, we were told, and not without a wag of the finger, is what happens to modern, mixed-market economies when they become adulterated by the blinding whims of free market capitalism.
And it would be a nice story, with a presumably easy remedy...if only it were true. Alas...
"All these claims [about us living in a free market] are wrong," asserts Jeffrey A. Tucker, editorial vice president of the Ludwig von Mises Institute and author of the refreshingly insightful Bourbon for Breakfast: Living outside the Statist Quo. "We live in the 100th year of a heavily regulated economy; and even 50 years before that, the government was strongly involved in regulating trade."
Continues Mr. Tucker: "The planning apparatus established for World War I set wages and prices, monopolized monetary policy in the Federal Reserve, presumed first ownership over all earnings through the income tax, presumed to know how vertically and horizontally integrated businesses ought to be, and prohibited the creation of intergenerational dynasties through the death tax."
Contrary to what interventionalists would have you believe, the government has not been repealing its influence in and control over our lives at all. Quite the opposite. We can see this by tracking the mammoth growth of the beast during the past century.
In the decade leading up to WWI, government spending as a percentage of GDP averaged a relatively minuscule 2.5%, give or take. By the time FDR had finished prolonging the Great Depression through the 1930s, that percentage had jumped to double digits. And today, government spending accounts for one-quarter of all economic activity in the world's largest economy, or one in every four dollars spent (25.32%). Never during time of peace has government spending occupied so much of the GDP pie chart.
(We'll leave aside the spurious nature of the GDP computation itself for another day but, suffice to say, GDP, as measured by the preferred "expense" method, actually rises when government spending increases. Ergo, GDP went through the roof during both the First and Second World Wars as the nation allocated capital to the manufacturing of military machinery. This led "top down" Keynesian economists to believe they had real economic growth on their hands, the origin of the "WWII cured the depression" myth. Of course, anyone familiar with Bastiat's "Broken Window" knows this to be an entirely fallacious argument and that thedestruction of capital is certainly no way to achieve prosperity.)
The very existence of the Federal Reserve itself flies in the face of any notion of free market capitalism. "For the government to authorize a counterfeiter-in-chief is a direct attack on the sound money system of a market economy," Mr. Tucker observes.
The "alchemic temple," as Mr. Tucker aptly describes it, used its monopoly on currency creation to pump trillions of dollars worth of credit into the supposedly laissez-faire system during the 1990s and early 2000s. This led, inevitably and with the direct collusion of Government Sponsored Enterprises (GSEs), Fannie Man and Freddie Mac, to the unsustainable expansion of the mortgage loan sector. Effectively, the government intervened to encourage - and for a while even reward - rampant malinvestment through the creation and distribution of money the free market never would have tolerated. And they have the hide to blame a free market that never existed for the subsequent implosion!
"With 'free markets' like this," quips Tucker, "who needs socialism?"
Is it any wonder then that those who support the fictitious narrative above are now wondering why the financial storm the state gave birth to has not yet passed? If government intervention is the cure to crises and not their cause, surely then with Bernanke pulling levers at the Fed, Obama barking orders from the ship's helm and Krugman spouting his Keynesian gibberish from the NYT's editorial pulpit, we ought to have already witnessed the remarkable recovery they promised last summer. And yet home prices continue to fall - one percent per month, at last count. Unemployment, too, is in the dumps with job creation unable even to keep pace with population growth. Meanwhile, that oft-referenced statistical go-to for Keynesians - GDP growth - is lower than when Bernanke unleashed his now infamous $600 billion QE2 program.
O Recovery, Recovery! Wherefore art thou Recovery?
They say the free market had "run wild," the implication being that if we could only elect a group of all-knowing, all-powerful bureaucrats to somehow train this savage beast, we would surely all be better off. But the free market is not like a domesticable animal; neither are the hundreds of millions of individuals, engaging in billions of individual interactions and transactions daily, who comprise it. To say that the free market ought to be tamed is really to say that those individuals who drive it ought to be tamed; that they ought to be taxed, regulated and herded along like beasts incapable of thinking for themselves.
This is, quite obviously we would think, the exact opposite of freedom and the liberty and prosperity for which free men and women strive. As such, it is surely something to freely oppose.Why It's NOT the End of America...
This is actually the greatest moment to be alive - and to grow incredibly wealthy.
Warning: What you're about to see is controversial. It will offend the "Gloom & Doom Crowd". Watch this urgent presentation now.The Daily Reckoning Presents The Saudi Arabia of Coal
Last year, something important happened in the coal markets. China actually imported coal for the first time. As recently as 2001, China exported 90 million tonnes. But in 2009, China imported around 86 million tonnes. That's a huge shift in less than a decade.
Chris Mayer
Overall, that import total is just a drop in the bottle. China alone burned about half the world's total demand for coal last year, about $2.8 billion tonnes. Over the next five years, China may well need another billion tonnes of coal annually.
While 86 million tonnes is not a big deal overall, it is a big deal in the coal trade. So China's demand has helped prop up prices.
Power generation is the big slice of the pie. The reason is simply that China has lots of coal, enough at minable depths to last for hundreds of years at current mining rates. Meanwhile, China lacks natural gas reserves. Hydropower is possible, but difficult, given the water strains that exist in the country. Nuclear power is a clear priority, as we've discussed before. But that's going to take some years before it makes a dent in China's coal demand.
Coal usage by China's power industry has nearly tripled in the last decade. That's an average growth rate of about 11%. The International Energy Agency estimates that China and India will account for 80% of the increase in demand for coal over the next two decades. These markets are obviously important to think about if you are going to invest in coal.
But to stay with China, what opportunities are there in satisfying China's demand for coal? 
Leaving aside the coal producers that export coal to China, there are a number of Chinese coal miners. These include China Coal, China Shenhua, Fushan Energy, Hidili Industry and Yanzhou Coal. As a group, they have lots of coal and big growth potential as they start to unlock those reserves.
The biggest growth, though, may be just outside of China, in Mongolia. Yes, Mongolia.
Mongolia is a big country, the 19th largest in the world, at over 600,000 square miles. It's also one of the emptiest countries in the world, with fewer than 3 million people. It has the lowest population density in the world. About 40% of that population lives in Ulan Bator, the capital city, which lies on a flat table of earth amid high mountains. It is the coldest capital in the world. Temperatures swing wildly and can drop 50 degrees in a single day.
Mongolia, though, is rich in resources - iron, tin, copper, gold and silver...and coal. Lots and lots of coal. Mongolia has 10% of the world's coal. Indonesia is currently the largest exporter of coal. Mongolia has double the amount of coal Indonesia has.
Total coal reserves are around 125 billion tons, according to AME Mineral Economics. This spans the full spectrum of coal, everything from high-grade coking coal (used in making steel) to low-grade lignite.
Yet Mongolia currently produces only around 10 million tons a year. AME reports only 40 of the 200 known coal deposits have active mining going on. There isn't the infrastructure in place to get the coal to market. But that's changing.
Already, about 64% of all of Mongolia's exports go to China. For China, this is like having the Saudi Arabia of coal right across the border. For Mongolia, China is a meal ticket. Trade with China has created an influx of cash in the country. There are new cafes and bars and hotels in Ulan Bator today. Mining, it seems, is Mongolia's economic future.
The only publicly traded Mongolian coal company is SouthGobi Energy, which trades in Toronto under the symbol SGQ. It seems to be quite a gem, too. SouthGobi has low mining costs and high-quality coal - better than many Chinese companies.
SouthGobi has one producing mine, Ovoot Tolgoi, and two other coal projects. Its producing mine is only about 25 miles from China's Ceke port, where the coal is then shipped by rail into China. This is a big advantage because sparse infrastructure in Mongolia can make it challenging to get coal to China.
SouthGobi plans to boost production from about 4 million tonnes per year currently to 14 million tonnes by 2013. China Investment Corp. (CIC), the state-owned wealth fund that manages China's bulging reserves, put a big slug in the company and now owns 14%. (It would own 26% if it exercised certain options.) Temasek Holdings, the Singapore state-owned fund, owns 2%. Ivanhoe Mines owns 57%.
So there are lots of insiders here who have just put fresh money in the deal. The CIC deal is important because it will surely help open doors for SouthGobi in China. Plus, I'm sure that the CIC would love to buy SouthGobi whole someday. SouthGobi, with prize assets, is an obvious goldfish among much larger fish.
Currently, the stock seems a bit rich, even given the potential growth here. The stock sells for about 30 times this year's estimated earnings. But if growth comes through as expected, earnings could nearly triple in 2012. So this is a high risk, high reward opportunity.
SouthGobi may be the first significant public company to capitalize on Chinese coal demand, but it won't be the last.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel's Note: Chris is the editor of Capital & Crisis, a flagship newsletter for the Agora Financial group and one of our most successful investment research services. If you like the cut of Chris's jib, why not join him and test-drive Capital & Crisis for a 90-day, risk-free trial today? Details here.
Wait... Was that a bit "salesy?" Ok, how about this: If you want to try Mr. Mayer's Capital & Crisis, order here. If not, don't.
No, no, no... Let's try this... Chris Mayer writes a newsletter called Capital & Crisis, in which he helps readers who don't have time to scour the markets find good, solid companies they may wish to keep on their radar. Lean more here.
Ok, that's it.External Advertisement
Follow the Leaders to Perfect Silver Eagles
Collectors lead the way when they head toward the highest-quality silver they can find. Smart buyers follow suit - to the 2011 25th Anniversary Silver Eagle. Graded in MS70, which means absolute, flawless perfection.
Each Silver Eagle is from the first 30 days of release...exactly what collectors covet.
Get this special offer today!Bill Bonner The Successful Failure of US Money Printing
Reckoning from London, England...
Bill Bonner
Dow down again - 25 points. Gold up again, $7. And oil still below $100.
Inflation worries up, in other words.
Economy down.
And now it's official. QE2 is a FLOP! See below...
To hear the papers tell it, US stocks are being weighed down by troubles in Europe. Here's the report from The New York Times:Sovereign debt concerns and the prospects for slower growth in Europe and Asia took their toll on global markets.
Yeah. The problems are all in Europe. If it weren't for the Greeks, and Italians, and Spaniards...it would be clear sailing here in the US.
Analysts said recent news from Europe had not instilled confidence in the Continent's ability to handle its fiscal challenges. Last week, Fitch Ratings downgraded Greece's credit ratings by three levels to B+, a rating that is below investment grade. Standard & Poor's lowered its outlook on Italy's debt to negative from stable over the weekend, citing a weaker outlook for growth and lower prospects for the country's ability to trim its debt.
But the main difference is probably that the Europeans don't cheat as much as we do. For example, unemployment in Spain is terrible, at 17% according to the figures we saw for March.
But wait, Yale economist Robert Shiller says unemployment in the US is miscalculated. It's really almost 16%. Not much difference with Spain.
Meanwhile, fire off a gun in Las Vegas and you're going to hit a homeowner who is underwater. Almost 3 out of 4 of them are below the surface. And get this...house prices are dropping at the rate of about 1% per month, according to the aforementioned Mr. Shiller.
The Spaniards also have to own up to their problems. They can't print money. They're on the euro, a currency controlled by the European Union...which is to say by France and Germany.
You may say, being on the euro 'limits Spain's policy options'. You may say that Spain is in a 'straitjacket' put on it by the larger economies of the Union. You may say that Spain would have an easier time of it if it still had the old, more flexible Spanish peseta.
You would be right. But you would be a moron.
The whole point is that there are some things that it is better NOT to have the easy, fun, devil-may-care option. Ask Dominique Strauss Kahn. Ask Arnold Schwarzenegger.
Take DSK, for instance. We'll bet he wished his wife had accompanied him on his business trip. If so, he might still be head of the IMF...diddling poor countries, rather than poor chambermaids!
Yes, dear reader, there are some options you're better off without. Printing money - with nothing to back it - is one of those things.
But wait. You say the Fed's money printing (otherwise known as QE2) has been a success? Think again. We've been saying for months that it won't work. Now, even the mainstream press is catching on. Here's the latest report from The Wall Street Journal (MarketWatch):BOSTON (MarketWatch) - It's cost $600 billion of your money. And it was supposed to rescue the economy. But has Ben Bernanke's huge financial stimulus package, known as "Quantitative Easing 2," actually worked as planned? QE2 is being wound down in the next few weeks. Fed Chairman Ben Bernanke has said it has left the economy "moving in the right direction."
Right. Some recovery.
But an analysis of the real numbers tells a very different story.
Turns out the program has created maybe 700,000 full-time jobs - at a cost of around $850,000 each.
House prices are lower than before QE2 was launched. Economic growth is slower. Inflation is higher.
Yes, it's sparked a massive boom on the stock market. Ordinary investors have started piling back into shares again. And last week we saw the latest example of the return of animal spirits on Wall Street, as stock in new dot-com LinkedIn skyrocketed on its debut.
But even the stock market boom hasn't been what it appears. An analysis shows that most of the rise in the Standard & Poor's 500 Index under QE2 has simply been a result of the decline in the dollar in which shares are measured.
The truth? QE2 has created a massive new bubble in dollar-based financial assets, from stocks to gold. Meanwhile, it has had zero visible effect on the real economy.
Take jobs. According to the US Labor Department, since last August the number of full-time workers has gone up by just 700,000, from 111.8 million to 112.5 million.
At a cost of $600 billion, that's $850,000 a job.
The picture's even more meager. Over the same period, the number of part-time workers has gone down by 600,000. In other words, we've basically shifted 600,000 or 700,000 workers from part-time jobs to full-time jobs.
The percentage of the population in work is actually lower today - 58.4%, compared to 58.5% last August. The percentage of the workforce in actual work, the so-called "participation rate," has fallen by half a percentage point.
Some recovery.
Regards,
Bill Bonner
for The Daily Reckoning
Thursday, 26 May 2011
Posts
